Comerica Economic Weekly

Economic data published in the last week of July showed moderate U.S. economic growth in Q2, likely setting up more of the same for Q3, and keeping the Federal Reserve on track for the beginning of balance sheet reduction this fall.

Real gross domestic product growth increased to a moderate 2.6 percent annualized rate in the second quarter, after a revised 1.2 percent growth rate for the first quarter of 2017. As expected some of the quirky factors that held back GDP in Q1 reversed in Q2.

New orders for durables goods surged by 6.5 percent in June, on the back of a doubling of commercial aircraft orders for the month. The core measure of durable goods orders, non-defense capital goods excluding aircraft, eased slightly by 0.1 percent.

Initial claims for unemployment insurance increased by 10,000 to hit 244,000 for the week ending July 22. Continuing claims dropped by 13,000, to hit 1,964,000 for the week ending July 15. These are good numbers consistent with ongoing job growth.

The Employment Cost Index for June increased by 0.5 percent over the previous three-month period. For the 12 months ending in June compensation costs are up by 2.4 percent. This was a tame report, but it does show that the rate of increase in both wages/salaries and benefits is climbing.

New home sales ticked up by 0.8 percent in June to a 610,000 unit annual rate. This was below the March peak of 638,000, but the trend looks positive.

Existing home sales eased by 1.8 percent in June, to a 5,520,000 unit annual rate. Over the past several months existing home sales again look range bound, near a 5.5 million unit pace.

The Case-Shiller U.S. National Home Price Index gained 0.2 percent in May, after seasonal adjustment, and was up 5.6 percent over the previous 12 months.

The Federal Open Market Committee voted on Wednesday to keep the fed funds rate range unchanged at 1.00 to 1.25 percent. The FOMC did not commit to a timetable, but the policy announcement was consistent with the widely held expectation that the Fed will begin balance sheet reduction this fall, possibly in October. We expect them to announce the starting date for balance sheet reduction at the next FOMC over September 19/20. We look for the next interest rate hike to come at the last FOMC meeting of this year, over December 12/13. However, weak inflation readings could delay the next rate hike.